Quick Comparison
| Feature | REIT (ETF) | Rental Property |
|---|
| Minimum investment | $50+ | $60,000-$150,000+ |
| Liquidity | Sell instantly | Months to sell |
| Leverage | None (unless margin) | 80% leverage (20% down) |
| Management effort | Zero | 5-20+ hours/month |
| Diversification | Dozens of properties | 1-2 properties (concentrated) |
| Historical returns | 8-10%/year | 8-15%/year (total) |
| Vacancy risk | None (pooled) | High impact (100% loss if vacant) |
| Control | None | Full control |
| Tax deductions | Limited | Extensive |
| Best for | Passive investors | Hands-on investors |
Returns Comparison
REIT Returns (Historical)
| Period | XRE (iShares Canadian REIT ETF) | S&P/TSX Capped REIT Index |
|---|
| 1-year | ~8% | ~8% |
| 5-year (annualized) | ~5-7% | ~5-7% |
| 10-year (annualized) | ~7-9% | ~7-9% |
| Distribution yield | ~4-5% | ~4-5% |
| Total return (long-term) | ~8-10% | ~8-10% |
Rental Property Returns (Typical)
| Return Component | Annual % | On $500K Property |
|---|
| Cash flow (net rent) | 2-5% of equity | $2,000-$5,000 |
| Appreciation | 3-5% of property value | $15,000-$25,000 |
| Mortgage paydown | 2-4% of equity | $2,000-$4,000 |
| Tax benefits | 1-2% effective | $1,000-$2,000 |
| Total annual return | 8-15% of equity | $20,000-$36,000 |
Rental returns are amplified by leverage (using borrowed money). REIT returns are unleveraged.
$100,000 Invested: 10-Year Comparison
| Scenario | REITs | Rental Property |
|---|
| Initial investment | $100,000 cash | $100,000 down payment |
| Property/portfolio value | $100,000 | $500,000 (5:1 leverage) |
| After 10 years (8% return) | $215,000 | ~$400,000+ equity |
| Income during period | $40,000-$50,000 (distributions) | $20,000-$50,000 (cash flow) |
| Effort required | None | Significant |
| Risk level | Moderate | Higher (concentrated) |
Cost Comparison
REITs
| Cost | Amount |
|---|
| Purchase | $0 (commission-free at most brokerages) |
| MER (XRE) | 0.61% |
| MER (VRE) | 0.38% |
| Trading fee | $0 at Wealthsimple, Questrade |
| Ongoing management by you | $0 |
| Total annual cost on $100K | $380-$610 |
Rental Property ($500K, $100K Down)
| Cost | Annual Amount |
|---|
| Mortgage interest | ~$18,000 |
| Property taxes | ~$4,000 |
| Insurance | ~$1,200 |
| Maintenance/repairs | ~$2,500-$5,000 |
| Property management (if hired) | ~$2,400-$3,000 |
| Vacancy (5%) | ~$1,500 |
| Legal/accounting | ~$500-$1,000 |
| Total annual cost | $30,000-$35,000 |
Most costs are covered by rental income, but the investor bears the risk.
Tax Treatment
REIT Tax Treatment (Non-Registered Account)
| Distribution Type | Tax Rate | Portion of Distribution |
|---|
| Interest/other income | Full marginal rate | 0-40% |
| Eligible dividends | Dividend tax credit | 10-30% |
| Capital gains | 50% inclusion | 5-20% |
| Return of capital | Tax-deferred (reduces ACB) | 20-60% |
| Foreign non-business income | Full marginal rate | 0-10% |
REIT tax treatment is complex. The mix changes every year and varies by REIT. Many investors hold REITs in registered accounts (TFSA, RRSP) to simplify taxes.
Rental Property Tax Treatment
| Item | Tax Treatment |
|---|
| Rental income | Marginal rate |
| Mortgage interest | Deductible |
| Property taxes | Deductible |
| Insurance | Deductible |
| Repairs | Deductible |
| Property management | Deductible |
| CCA (depreciation) | Deductible (4% building) |
| Capital gain on sale | 50% inclusion (first $250K), 66.7% after |
Rental property offers more tax deductions, which can shelter income. However, CCA recapture on sale adds complexity.
Where to Hold REITs
| Account | Recommendation |
|---|
| TFSA | Excellent (all distributions tax-free) |
| RRSP | Good (tax-deferred) |
| Non-registered | Acceptable (complex tax, return of capital benefits) |
| FHSA | Good (if first-time buyer) |
Risk Comparison
| Risk Factor | REIT | Rental Property |
|---|
| Market volatility | Yes (price fluctuates daily) | No (appraised value, less visible) |
| Vacancy | Pooled (minimal impact) | Devastating (0 income, costs continue) |
| Bad tenant | N/A | Major risk (damage, non-payment) |
| Concentration | Diversified (many properties) | Concentrated (1-2 properties) |
| Leverage risk | None (typically) | High (mortgage amplifies gains AND losses) |
| Liquidity risk | None (sell instantly) | High (months to sell) |
| Interest rate risk | Moderate | High (affects mortgage payments) |
| Regulatory risk | Moderate | High (rent control, tenant rights) |
Decision Framework
Choose REITs If You
| Factor | Details |
|---|
| Have limited capital | Can start with $50+ |
| Want passive investing | No management required |
| Want diversification | Exposure to many properties |
| Value liquidity | Can sell anytime |
| Don’t want to be a landlord | No tenants, no maintenance calls |
| Want simplicity | Buy ETF and collect distributions |
| Are investing in registered accounts | Tax-efficient in TFSA/RRSP |
Choose Rental Property If You
| Factor | Details |
|---|
| Have $100,000+ for down payment | Enough to start |
| Want higher returns (with more work) | Leverage amplifies returns |
| Are handy/enjoy property management | Lower maintenance costs |
| Want tax deductions | Extensive deductions available |
| Prefer tangible assets | You can see and touch it |
| Want maximum control | Choose tenants, renovations, pricing |
| Have time to manage | 5-20 hours/month |
| Are in a market with good rent-to-price ratio | Matters for cash flow |
Choose Both
Many investors combine REITs and rental property:
| Allocation | Strategy |
|---|
| Core portfolio | REIT ETF (5-15% of portfolio) for diversification |
| Active investment | 1-2 rental properties for leverage and control |
| TFSA/RRSP | REITs (tax-sheltered) |
| Non-registered | Rental property (deductions offset income) |
Top Canadian REIT ETFs
| ETF | Holdings | MER | Yield | Type |
|---|
| XRE | 19 REITs | 0.61% | ~4.5% | Broad Canadian |
| VRE | 20 REITs | 0.38% | ~4.2% | Broad Canadian |
| ZRE | 23 REITs | 0.61% | ~4.5% | Broad Canadian |
| RIT | 16 REITs | 0.55% | ~5.0% | Equal-weight |
Largest Canadian REITs
| REIT | Sector | Yield |
|---|
| Canadian Apartment Properties (CAR.UN) | Residential | ~3.5% |
| RioCan (REI.UN) | Retail/mixed-use | ~5.5% |
| SmartCentres (SRU.UN) | Retail | ~6.5% |
| Choice Properties (CHP.UN) | Retail/industrial | ~5.0% |
| Allied Properties (AP.UN) | Office | ~9.0% |
| Summit Industrial (SMU.UN) | Industrial | ~4.0% |
| Killam Apartment (KMP.UN) | Residential | ~4.0% |